UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Commission file number 0-26450
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ORION NETWORK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2008654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices )
(301-258-8101)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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None
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Securities registered pursuant to Section 12 (g) of the Act:
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Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the February 28, 1997 closing price of these shares) was approximately
$101 million. The Common Stock is traded over-the-counter and quoted through the
NASDAQ National Market.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 1997
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Common Stock, $.01 par value 11,160,099 shares
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EXPLANATORY NOTE
This Form 10-K/A amends Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) and Item 8 (Consolidated
Financial Statements) to add the following:
1. One sentence is added to Management's Discussion and Analysis of
Financial Condition and Results of Operations indicating that there
are no restrictions on the subsidiaries of the registrant paying
dividends to the registrant.
2. Footnote 9 to the Consolidated Financial Statements is amended to add
the following:
a. the registrant is holding company with no assets or operations
other than its investments in its subsidiaries;
b. each of the registrant's subsidiaries that guaranteed the senior
notes issued by the registrant in January 1997 is a wholly (100%)
owned subsidiary of the registrant and such subsidiaries comprise
all of the direct and indirect subsidiaries of the registrant
(other than inconsequential subsidiaries); and
c. separate financial statements of the subsidiary guarantors are
not presented because (i) such subsidiaries have jointly and
severally guaranteed such notes on a full and unconditional basis
(ii) the aggregate assets, liabilities, earnings and equity of
such subsidiaries are substantially equivalent to the assets,
liabilities, earnings and equity of the registrant on a
consolidated basis and (iii) management has determined that such
information is not material to investors.
These items are being added in connection with an application by the
registrant to the Securities and Exchange Commission for a determination
(granted in June 1997) that the registrant need not include in its Consolidated
Financial Statements separate financial information regarding its subsidiaries
which guaranteed the senior notes issued by the registrant in January 1997.
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ORION NETWORK SYSTEMS, INC.
TABLE OF CONTENTS
Page
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 8. Financial Statements and Supplementary Data 8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Orion's principal business is the provision of satellite communications for
private communications networks and video distribution and other satellite
transmission services. From its inception in 1982 through January 20, 1995, when
Orion 1 commenced commercial operations, Orion was a development stage
enterprise. Prior to January 1995, Orion's efforts were devoted primarily to
monitoring the construction, launch and in-orbit testing of Orion 1, product
development, marketing and sales of interim private communications network
services, raising financing and planning Orion 2 and Orion 3.
During 1996, OrionSat was the sole general partner in Orion Atlantic and
Orion had a 41 2/3% equity interest in Orion Atlantic. As a result of Orion's
control of Orion Atlantic during 1996, Orion's consolidated financial statements
include the accounts of Orion Atlantic. All of Orion Atlantic's revenues and
expenses are included in Orion's consolidated financial statements, with
appropriate adjustment to reflect the interests of the Limited Partners in Orion
Atlantic's losses prior to the Exchange. The assets and liabilities reported in
the consolidated balance sheets at December 31, 1996 and December 31, 1995
primarily pertain to Orion Atlantic.
All subsidiaries of Orion other than inconsequential subsidiaries
("Subsidiary Guarantors"), have fully and unconditionally guaranteed the Notes
(as defined below) on a joint and several basis. No restrictions exist on the
ability of the Subsidiary Guarantors to pay dividends or make other
distributions to Orion, except to the extent provided by law generally (e.g.,
adequate capital to pay dividends under state corporate laws).
RECENT DEVELOPMENTS
In January 1997, Orion consummated a series of transactions that are
described below.
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's operating subsidiary,
Orion Atlantic, that owns the Orion 1 satellite. Specifically, the Company
acquired the Orion Atlantic limited partnership interests and other rights
relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange"), their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C 6% Cumulative Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners' to receive
repayment of various advances (aggregating approximately $41.4 million at
December 31, 1996). The 123,172 shares of Series C Preferred Stock issued in the
Exchange are convertible (as of January 31, 1997) into approximately 7 million
shares of the Company's Common Stock. As a result of the Exchange, certain of
the Exchanging Partners became principal stockholders of the Company. The
Exchange is described in greater detail under the caption "The Merger, the
Exchange and the Debenture Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Orion Asia Pacific Corporation
from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in
exchange for approximately 86,000 shares of the Company's Common Stock) results
in the Company owning 100% of Orion Atlantic and its other significant
subsidiaries and, therefore, a greatly simplified corporate structure.
THE MERGER
The Exchange was conducted on a tax-free basis by means of a Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received stock in the Company with substantially identical rights to the Old
Orion stock they held prior to the effective time of the Merger. Following the
Merger, the Company changed its name from Orion Newco Services, Inc. to Orion
Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network
Systems, Inc. changed its name to Orion Oldco Services, Inc. The Exchange and
Merger are described in greater detail under the caption "The Merger, the
Exchange and the Debenture Investments" in the Company's Registration Statement
on Form S-4 (Registration No. 333-19795).
The Company is the successor issuer to Old Orion and filed a Registration
Statement on Form 8-B with the Securities and Exchange Commission on January 31,
1997, to register all the issued and outstanding shares of Common Stock and
preferred stock of the Company. The Company is considered the successor to Old
Orion for purposes of the NASDAQ National Market and the Company's Common Stock
is quoted on the NASDAQ National Market under the trading symbol "ONSI."
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FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Bond Offering") comprised of approximately $445 million of Senior Note
Units, each of which consists of one 11.25% Senior Note due 2007 (a "Senior
Note") and one Warrant to purchase 0.8463 shares of common stock, par value $.01
per share ("Common Stock") of the Company (a "Senior Note Warrant"), and
approximately $265.4 million of Senior Discount Note Units, each of which
consists of one 12.5% Senior Discount Note due 2007 (a "Senior Discount Note,"
and together with the Senior Notes, the "Notes") and one Warrant to purchase
0.6628 shares of Common Stock of the Company (a "Senior Discount Note Warrant,
and together with the Senior Note Warrants, the "Warrants"). Interest on the
Senior Notes will be payable semi-annually in cash on January 15 and July 15 of
each year, commencing July 15, 1997. The Senior Discount Notes will not pay cash
interest prior to January 15, 2002. Thereafter, cash interest will accrue until
maturity at an annual rate of 12.5% payable semi-annually on January 15 and July
15 of each year, commencing July 15, 2002. The exercise price for the Warrants
will be $.01 per share of Common Stock of the Company. The shares of Common
Stock of the Company initially issuable upon exercise of the Warrants represent
approximately 2.62% of the outstanding Common Stock of the Company on a fully
diluted basis as of January 31, 1997. The Bond Offering was underwritten by
Morgan Stanley & Co. Incorporated and Merrill Lynch & Co. The foregoing
description of the Notes is qualified in its entirety by the description of such
Notes in the Indentures and Notes documents, copies of which have been filed as
exhibits to this Annual Report on Form 10-K.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace purchased
$50 million of the Convertible Debentures and Matra Marconi Space purchased $10
million of the Convertible Debentures (collectively, the "Convertible Debentures
Offering," and together with the Bond Offering, the "Financings"). The
Convertible Debentures will mature in 2012, and will bear interest at a rate of
8.75% per annum to be paid semi-annually in arrears solely in Common Stock of
the Company. The Convertible Debentures are subordinated to all other
indebtedness of the Company, including the Notes.
The net proceeds of the Bond Offering and Convertible Debentures Offering
were used by the Company to repay the Orion 1 credit facility, pre-fund the
first three years of interest payments on certain of the Notes, and will be used
to build and launch of two additional satellites, Orion 2 and Orion 3.
ORION 2 AND ORION 3 COMMENCEMENT OF CONSTRUCTION
Orion 2 and Orion 3 Construction Contracts. Orion commenced construction of
Orion 2 in February 1997 under a satellite procurement contract with Matra
Marconi Space for Orion 2. The contract for Orion 2 provides for delivery in
orbit of Orion 2 by June 1999, excluding launch insurance, for a firm fixed
price of $201 million. Orion commenced construction of Orion 3 in December 1996
and entered into a satellite contract with Hughes Space and Communications
International, Inc. for Orion 3 in January 1997. The contract for Orion 3
provides for delivery in orbit of Orion 3 by December 1998, excluding launch
insurance, for a firm fixed price of $208 million.
Pre-Construction Lease on Orion 3. Orion has entered into a contract with
DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will,
subject to certain conditions, lease eight dedicated transponders on Orion 3 for
13 years, in return for approximately $89 million, payable over a period from
December 1996 through seven months following the lease commencement date for the
transponders (which is scheduled to occur by January 1999). Payments are subject
to refund unless Orion 3 commences commercial operation by June 30, 1999.
OVERVIEW
Orion's revenues are principally generated under three to four year
contracts for delivery of communications services. Such revenues are derived
principally from recurring monthly fees from its customers, although many
contracts include initial non-recurring installation and other fees. These
non-recurring fees generally are structured to cover the Company's actual costs
of installation of the customer's site-based equipment. The revenues from each
contract vary, depending upon the type of service, amount of capacity, data
handling ability of the network, the number of VSATs (which generally are owned
by Orion), value-added services and other factors. Depending on the complexity
of the services to be provided to a customer, the period between the date of
signature of a contract and the commencement of actual services (and receipt of
fees) typically ranges from 30 days to six months. Substantially all of Orion's
contracts are denominated in U.S. dollars, although some contracts are
denominated in pounds sterling, deutschemarks, Austrian shillings or French
francs. Orion begins to record revenues under its contracts upon service
commencement to the customer.
The services provided by Orion have been subject to decreasing prices over
recent years and this pricing pressure is expected to continue (and may
accelerate) for the foreseeable future, particularly if, as expected, capacity
continues to increase. Orion will need to increase its volume of sales in order
to compensate for such price reductions. Orion believes that customers will
increase the data speeds in their communications networks to support new
applications, and that such upgrading of customer networks will lead to
increased revenues that will mitigate the effect of price reductions. However,
there can be no assurance that this will occur. Orion expects to continue to
incur increasing net losses and negative cash flow (after payments for capital
expenditures and interest) for the foreseeable future.
2
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Orion's direct cost of services includes principally (i) costs relating to
the installation, maintenance and licensing of VSAT earth stations at its
customers' premises; (ii) satellite lease payments for transponder capacity
(generally for services outside of the Orion 1 footprint); and (iii) associated
miscellaneous expenses. Sales and marketing expenses consist of salaries, sales
commissions (including commissions to third party sales representatives), travel
and promotional expenses. The Company has recently commenced a significant
expansion of its marketing program and expects to continue this expansion
through 1997. Due to the complexity of the Company's services, and the continued
expansion of sales personnel, sales and marketing expense is expected to
increase significantly during 1997. Engineering and technical expenses,
consisting principally of personnel costs and travel, relate to TT&C, network
monitoring, network design and similar activities. The Company constructed its
TT&C facilities to control two satellites. As a result, the Company anticipates
a slight increase in costs with Orion 2 and a more substantial increase in costs
with Orion 3, which will require separate TT&C facilities. General and
administrative expenses consist of in-orbit insurance premiums, personnel costs
other than for selling and engineering, information systems, professional
services, and occupancy costs. These costs will increase generally as the
Company's operations expand. Specifically, in-orbit insurance costs will
increase significantly following the launches of Orion 2 and Orion 3.
Depreciation and amortization expenses result mainly from the depreciation of
the Orion 1 satellite, VSATs and the related equipment to service the expansion
of the private network communication services business (see Note 2 of the Notes
to Consolidated Financial Statements) and will increase substantially after the
launch of Orion 2 and Orion 3. Interest income is primarily the result of
interest earned on the proceeds from Orion's private and public equity
offerings. Interest costs will increase substantially as a result of the bond
offering completed January 31, 1997, and will increase again after additional
financing for Orion 2 and Orion 3 is obtained. Such financing will be required
substantially in advance of the anticipated revenues from Orion 2 or Orion 3.
Orion's costs (other than sales commissions) generally do not vary substantially
with the amount of revenue from the Orion 1 satellite.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue for the year ended December 31, 1996 was $41.8
million, compared to $22.3 million for the same period in 1995, an increase of
87%. Revenues from private communications network services were $17.0 million in
1996 compared to $10.0 million for the comparable period in 1995, as the number
of sites in service increased to 322 as of December 31, 1996, from 151 at
December 31, 1995. Revenues from video distribution and other satellite
transmission services were $24.8 million for 1996 compared to $12.3 million for
the same period in 1995 resulting from a substantial increase in customers for
these services in 1996.
OPERATING EXPENSES
Direct expenses. Direct expenses for the year ended December 31, 1996, were
$6.0 million compared to $10.5 million for the same period in 1995. The decrease
of $4.5 million, or 43%, was primarily attributable to accruals for satellite
incentive obligations owed by Orion to the contractor under the Orion 1
Satellite Contract during the initial satellite deployment period from January
20, 1995 through June 30, 1995. The Company capitalized the present value of the
remaining satellite incentive obligation of approximately $14.8 million,
effective July 1, 1995, as part of the cost of the satellite. As of December 31,
1996, Orion had obligations with a present value of approximately $22.4 million
with respect to satellite incentives.
Sales and marketing expenses. Sales and marketing expenses were $11.5
million for the year ended December 31, 1996, as compared to $8.6 million in the
same period of 1995. The increase of $2.9 million, or 34% is primarily
attributable to sales commissions, third party sales representative fees and
ground operator fees associated with the growth in the private communications
network service business.
Engineering and technical expenses. Engineering and technical expenses were
$8.7 million in the year ended December 31, 1996, as compared to $8.5 million
for the comparable period in 1995. The increase was due to customer engineering
functions in support of the growth in private communications network service
business.
General and administrative expenses. General and administrative expenses
were $15.1 million for the year ended December 31, 1996, compared to $10.1
million for the period ended December 31, 1995. The increase of $5.0 million, or
50%, for the year ended December 31, 1996 was primarily due to the inclusion of
the cost of in-orbit life insurance for the entire period during 1996. The
policy became effective in May 1995.
Depreciation and amortization. Depreciation and amortization expense for
the year ended December 31, 1996, was $36.9 million, an increase of $5.5
million, or 18%, over the same period in 1995. The increase is primarily a
result from depreciation of VSATs and other ground equipment to service the
expansion of the private network services business and depreciation of the Orion
1 satellite, which was placed in service January 20, 1995.
Interest. Interest income was $2.3 million for the year ended December 31,
1996, compared to $1.9 million for the year ended December 31, 1995. The
increase in interest income ($0.4 million or 21%) during 1996 is primarily a
result of interest earned on increased cash balances from the proceeds of the
Company's initial public offering in August 1995. Interest expense was $27.8
million for the year ended December 31, 1996, compared to $24.7 million for the
comparable period in 1995. The increase in interest expense of $3.1 million in
1996 is attributable to expensing interest (including commitment fees, interest
accretion associated with the Orion 1 satellite incentive obligation and
amortization of deferred financing costs) from the in-service date of Orion 1
and the impact of an interest rate cap agreement in 1996. Prior to the
in-service date of Orion 1, substantially all interest expense was capitalized.
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Other. Other expenses were $.02 million for the year ended December 31,
1996, compared to $3.4 million for the same period in 1995. The decrease is
primarily related to costs incurred in connection with Orion Atlantic's plans to
raise financing for Orion 2, which plans were deferred in November 1995.
Net loss. The Company incurred a net loss of $27.2 million, compared to a
net loss of $26.9 million for the years ended December 31, 1996 and 1995,
respectively, after deduction of the limited partners' and minority interests'
share in the Company's losses before minority interests' of $34.6 million and
$46.1 million, respectively. Net loss is expected to increase substantially in
subsequent periods as a result of interest expense on the notes issued in
connection with the offering in January 1996 and the elimination of the minority
interests in Orion Atlantic.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenue. Services revenue for 1995 was $22.3 million compared to $3.4
million for 1994. Revenues from private communications network services were
$10.0 million from 72 customers in 1995 and $3.4 million from 18 customers in
1994, as the number of sites in service increased to 151 from 53. Revenues from
transmission capacity and video distribution services were $12.3 million during
1995. There were no revenues from these services during 1994, as Orion 1
commenced operations on January 20, 1995.
OPERATING EXPENSES
Direct expenses. Direct expenses were $10.5 million and $3.5 million in
1995 and 1994, respectively. The increase of $7.0 million, or 199%, was
primarily attributable to accruals for satellite incentives during 1995, which
were not applicable prior to launch in November 1994, costs associated with
equipment sales ($2.5 million in 1995, $0 in 1994), and installation and
maintenance costs in connection with higher volumes of customer sites placed in
service during 1995 ($1.3 million in 1995, $0.5 million in 1994). These
increases were partially offset by a reduction in leased transponder capacity
costs as customers were transferred from leased capacity to Orion 1. No
equipment sales occurred during 1994.
Sales and marketing expenses. Sales and marketing expenses were $8.6
million in 1995, as compared to $5.9 million in 1994, an increase of $2.7
million or 47%. The increase is due to the hiring of additional sales personnel,
increased advertising and promotion expenses associated with increased sales and
equipment sales commissions.
Engineering and technical expenses. Engineering and technical expenses were
$8.5 million in 1995, as compared to $3.0 million for 1994, an increase of $5.5
million or approximately 184%. The increase is attributable to increased
staffing requirements related to control and operation of the satellite, and
customer engineering functions in support of the expansion of the network
services business.
General and administrative expenses. General and administrative expenses
were $10.1 million for 1995 compared to $5.1 million for 1994. The increase of
$5.0 million or 99% was primarily due to the cost of in-orbit insurance for
Orion 1, beginning in May 1995, and other costs associated with Orion's
commencement of full commercial operations.
Depreciation and amortization. Depreciation and amortization was $31.4
million in 1995, an increase of $29.7 million, as compared to $1.7 million for
1994. The increase primarily resulted from the commencement of depreciation of
Orion 1 upon being placed in service January 20, 1995.
Interest. Interest income was $1.9 million for 1995, compared to $0.4
million for the prior year. The increase in interest income during 1995 is
primarily a result of interest earned on proceeds from Orion's initial public
offering in August 1995. Interest expense, net of capitalized interest,
increased from $0.06 million for 1994 to $24.7 million for 1995. The increase in
interest expense in 1995 is attributable to expensing interest (including
commitment fees and amortization of deferred financing costs) from the
in-service date of Orion 1. Prior to that date, substantially all interest
expense was capitalized as part of the cost of Orion 1.
Other. Other expenses of $3.4 million for the year-ended December 31, 1995
are primarily related to costs incurred in connection with Orion Atlantic's
plans to raise financing for Orion 2, which plans were deferred in November
1995.
Net loss. The Company incurred a net loss of $26.9 million and $8.0 million
for 1995 and 1994, respectively, after deduction of the Limited Partners' and
minority interests' share in the Company's results of operations of $46.1
million and $7.4 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Prior Funding. Orion has required significant capital for operating and
investing activities in the development of its business, and will continue to
need to expend significant additional capital in the future to develop fully its
global satellite communications system. The Company's funding for its operations
through January 1997 had been provided primarily by the sale of equity
securities, including the completion of its initial public offering in August
1995 which generated proceeds to the Company of approximately $52 million (net
of underwriting discounts), bank loans, vendor financing, lease arrangements and
short-term loans from its investors. Funding for the construction and launch of
the Orion 1 satellite and related facilities was fully committed through $90
million of equity from the limited partners of Orion Atlantic, an aggregate of
$251 million under a secured bank credit facility and approximately $11 million
under other debt facilities, dedicated primarily to the construction of the TT&C
facility, which is being used to control Orion 1. The Orion 1 credit facility
was refinanced in January 1997 with the proceeds from the Bond Offering, and
concurrently with the Bond Offering, Orion acquired all of the limited
partnership interests (those which it did not already own) in Orion Atlantic in
exchange for 123,172 shares of Series C Convertible Preferred Stock representing
approximately 7 million underlying common shares.
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Existing Capital Resources. The net proceeds of the January 1997 Bond
Offering to the Company were approximately $684 million, and the net proceeds of
the Convertible Debentures Offering were approximately $59 million. Of the Bond
Offering proceeds, approximately $223 million was used for repayment of the
Orion 1 credit facility (including payment of accrued interest and hedge
breakage costs), approximately $24 million was used to make certain initial
payments for the Orion 2 satellite contract, approximately $13 million was used
to pay accrued satellite incentive fees under the Orion 1 satellite contract and
approximately $4 million was used to pay amounts owing to STET, a former limited
partner of Orion Atlantic. On a pro forma basis, after giving effect to the Bond
Offering, the Convertible Debentures Offering and other related transactions as
of December 31, 1996, the Company had cash and cash equivalents of $140 million
and restricted and segregated cash of $407 million including $273 million which
was segregated in the financial statements by the Company to be used to make
payments for additional satellites and certain related costs. The restricted
cash consisted of $134 million placed in a pledged account (to pre-fund the
first six interest payments on the Senior Notes).
Existing Indebtedness
Notes. In the Bond Offering, Orion issued approximately $445 million of
11.25% Senior Notes due 2007 and approximately $484 million principal amount at
maturity ($265.4 million initial accreted value) of 12.5% Senior Discount Notes
due 2007. Interest on the Senior Notes is payable semi-annually in cash on
January 15 and July 15 of each year, commencing July 15, 1997. The Senior
Discount Notes do not accrue cash interest prior to January 15, 2002.
Thereafter, cash interest will accrue until maturity at an annual rate of 12.5%
payable semi-annually on January 15 and July 15 of each year, commencing July
15, 2002.
The Notes have the benefit of Guarantees issued by each of the material
subsidiaries of the Company. The Senior Notes initially are secured by the
securities purchased with the $134 million held in a pledged account until the
Company makes the first six scheduled interest payments on the Senior Notes and
thereafter the Senior Notes will be unsecured. The Senior Discount Notes are
unsecured. The Notes are redeemable, at the Company's option, in whole or in
part, at any time on or after January 15, 2002 at specified redemption prices.
In the event of a change of control (as defined in the indentures relating to
the Notes), the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of their principal or
accreted value, plus accrued and unpaid interest thereon to the repurchase date.
The indebtedness evidenced by the Notes ranks pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and the guarantors, respectively, and senior in right of payment to all existing
and future subordinated indebtedness of the Company and the guarantors. The
indentures relating to the Notes (the "Indentures") contain certain covenants
which, among other things, restrict distributions to stockholders of the
Company, the repurchase of equity interests in the Company and the making of
certain other investments and restricted payments, the incurrence of additional
indebtedness by the Company and its restricted subsidiaries, the creation of
certain liens, certain asset sales, transactions with affiliates and related
parties, and mergers and consolidations. The foregoing description of the Notes
is qualified in its entirety by the description of such Notes in the Indentures
and Notes documents, copies of which have been filed as exhibits to this Annual
Report on Form 10-K.
Convertible Debentures. In January 1997, the Company also completed the
sale of $60 million of its convertible junior subordinated debentures to British
Aerospace ($50 million) and Matra Marconi Space ($10 million). The Convertible
Debentures will mature in 2012, and will bear interest at a rate of 8.75% per
annum to be paid semi-annually in arrears solely in Common Stock of the Company
at prices of between $10.21 and $14.00 per share, depending on the average
trading prices of the Common Stock during the applicable measurement period. The
Convertible Debentures (and accrued but unpaid interest) may be converted in
whole or in part into Common Stock at any time at an initial conversion rate of
$14.00 per share, as adjusted for stock splits or other recapitalizations,
certain dividends or issuances of stock to all stockholders, issuances of stock
(or certain rights to acquire stock) at a price per share below $14.00, and
other events.
Orion may at any time (except during 90 days after a change in control)
redeem all or part (but not less than 25% on any one occasion) of the
Convertible Debentures for cash consideration determined by multiplying the
number of shares of Common Stock issuable upon conversion of the Convertible
Debentures by the greater of (i) the average closing price of the Common Stock
over the 20 trading days preceding the redemption or (ii) $17.50 per share.
Alternatively, Orion, in its sole discretion, may effect the sale through a
public or private offering, of the Common Stock underlying the Convertible
Debentures or received as payment of dividends on, the Convertible Debentures.
In such event, the holders of the Convertible Debentures will be entitled to
receive a price per share equal to the greater of (a) at least 95% of the
average closing price of the Common Stock over the preceding 20 trading days or
(b) $17.50 per share. From and after the time when less than $50 million of
Notes remain outstanding, in the event of a change of control of Orion (defined
as the acquisition by any stockholder of a majority of the voting securities of
Orion), either Orion or any holder of the Convertible Debentures may, within 90
days after such change of control, require the sale of the Convertible
Debentures, as converted into Common Stock, to Orion for a purchase price equal
to the greater of (a) the price payable in an optional redemption (as described
above) and (b) the price paid to holders of Common Stock in the change of
control transaction. The Indentures for the Notes contain a covenant which will
effectively prohibit Orion from honoring such right.
The Convertible Debentures are subordinated to all other indebtedness
of the Company, including the Notes. The Convertible Debentures contain minimal
covenants and events of default so long as $50 million or more of the Notes
remain outstanding, but a more extensive set of covenants and events of default
will apply after less than $50 million of Notes are outstanding.
Other Indebtedness and Other Obligations. At December 31, 1996, the
Company had outstanding indebtedness of approximately $7.0 million under a seven
year term loan provided by General Electric Capital Corporation ("GECC") for the
TT&C facility, which is secured by the TT&C facility and various assets relating
thereto. Additionally, at December 31, 1996 the Company had obligations of
approximately $44 million, with a present value of $22.4 million, payable to the
manufacturer of Orion 1 through 2007 (of which $13 million was paid in January
1997 upon
5
<PAGE>
the completion of the Bond Offering), and $8 million payable to a former partner
in Orion Atlantic through 1997 (of which approximately $5 million, plus interest
of approximately $1.7 million was paid in cash in January 1997 upon the closing
of the Bond Offering).
Current Funding Requirements. Based upon its current expectations for
growth, the Company anticipates it will have substantial funding requirements
over the next three years to fund the costs of Orion 2 and Orion 3, the purchase
of VSATs, other capital expenditures and other capital needs. Interest charges
on the Senior Notes over the next three years are fully provided for by
Restricted Cash.
The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are
expected to aggregate approximately $500 million. In addition to the $3 million
paid in the fourth quarter of 1996, Orion will need to make payments of
approximately $98 million ($37.3 million of which had already been paid as of
March 1, 1997), $350 million and $50 million in 1997, 1998 and 1999,
respectively. These amounts include the Company's estimate regarding the cost of
launch insurance, although the Company has not had material discussions with
potential insurers and has not received any commitment to provide insurance. The
contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction
and launch of those satellites and provides for penalties in event of late
delivery by the manufacturer, however, the Company's actual payments could be
substantially higher due to any change orders for the satellites, insurance
rates, delays and other factors.
The Company anticipates that its existing cash balances and payments
under the DACOM contract will be sufficient to meet substantially all of its
capital requirements for the delivery in orbit of Orion 2 and Orion 3. In
connection with the Bond Offering, the Company segregated $273 million of the
net proceeds to make payments for additional satellites and certain related
costs (or to pay interest and principal on the Notes). The Company also can use
a portion of its working capital for such costs if it chooses to do so. The
Company had working capital of $126 million at December 31, 1996 (after giving
effect to the Transactions). However, there can be no assurance that cost
increases for Orion 2 and/or Orion 3 due to change orders, insurance rates or
construction delays, among other factors may not increase the Company's capital
requirements or that the Company's growth may vary from its expectations
resulting in changes in its cash requirements or expected cash.
The balance of the Company's funding requirements are dependent upon its
growth and cash flow from operations. The Company cannot predict whether its
existing resources and cash flows will be adequate to cover its future cash
needs. If existing resources and cash flows are not sufficient to cover the
Company's future cash needs, the Company will need to raise additional
financing. The Company does not have a revolving credit facility or other source
of readily available capital. Sources of additional capital may include public
or private debt, equity financings or strategic investments. To the extent that
the company seeks to raise additional debt financing, the Indentures limit the
amount of such additional debt (under a variety of provisions contained in such
Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as
collateral for indebtedness for money borrowed. If the Company requires
additional financing and is unable to obtain financing from outside sources in
the amounts and at the times needed, there would be a material adverse effect on
the Company.
TAXES
As of December 31, 1996, Orion had net operating loss carryforwards for
federal tax purposes of approximately $77.7 million. The ability of Orion to
benefit from net operating losses for federal income tax purposes will depend on
a number of factors, including whether Orion has sufficient income from which to
deduct the losses, limitations that may arise as a result of changes in the
ownership of Orion, including as a result of the Transactions and other factors,
and certain other limitations which may significantly reduce the economic
benefit of those losses to Orion. Due to uncertainty regarding its ability to
realize the benefits of such net operating loss carryforwards, the Company has
established a valuation allowance for the full amount of its net operating loss
carryforwards. Of Orion's net operating losses, approximately $58.9 million was
incurred by Orion Atlantic and allocated to Orion. Orion Atlantic is structured
as a partnership for U.S. income tax purposes. As a result, Orion Atlantic
itself generally should not be subject to federal income taxation. Instead, the
partners of Orion Atlantic, including Orion and OrionSat, will separately report
their allocable shares of Orion Atlantic's net income, loss, gain, deductions,
and credits, as determined under the allocation provisions of the Partnership
Agreement. Orion Atlantic may, however, be subject to income tax on a portion of
its income in certain states and other countries in which it has operations.
Under the Partnership Agreement, the first $20 million of any losses was
allocated to OrionSat, and any losses in excess of that amount generally have
been allocated to the partners, including Orion and OrionSat, in proportion to
their respective percentage interests. Subsequent to consummation of the
Exchange, all losses will be allocated to Orion.
EFFECT OF INFLATION
Orion believes that inflation has not had a material effect on the results
of operations to date.
6
<PAGE>
EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Orion adopted Statement No. 121 in
the first quarter of 1996. The effect of adoption was not material to its
financial condition or results of operations.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock
Based Compensation, which is effective for awards after January 1, 1996. Orion
has elected to continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock based award programs, because the
alternative fair value accounting provided for under FASB Statement No. 123
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
employee award equals the market price of the underlying stock on the date of
grant, as has been the case historically with Orion's awards, no compensation
expense is recognized.
7
<PAGE>
ITEM 8. REPORT OF INDEPENDENT AUDITORS.
The Board of Directors
Orion Network Systems, Inc.
We have audited the accompanying consolidated balance sheets of Orion
Network Systems, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Orion Network
Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Washington, DC
March 7, 1997
8
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 42,187,807 $ 55,111,585
Accounts receivable (less allowance for doubtful accounts of
$100,000 and $278,000 at December 31, 1996 and 1995, respectively) 6,473,316 5,189,598
Notes receivable and accrued interest 78,969 129,810
Prepaid expenses and other current assets 3,504,434 3,168,058
-------------- -------------
Total current assets 52,244,526 63,599,051
Property and equipment, at cost:
Land 73,911 73,911
Telecommunications equipment 25,342,528 13,836,841
Furniture and computer equipment 4,849,711 3,395,799
Satellite and related equipment 321,247,346 321,407,936
-------------- -------------
351,513,496 338,714,487
Less: accumulated depreciation (68,224,957) (32,170,865)
Satellite construction in progress 4,560,844 510,613
-------------- -------------
Net property and equipment 287,849,383 307,054,235
Deferred financing costs, net 12,918,233 12,894,720
Other assets, net 5,252,302 5,527,221
-------------- -------------
Total assets $ 358,264,444 $ 389,075,227
============== =============
Liabilities and stockholders' equity (deficit) Current liabilities:
Accounts payable $ 6,411,028 $ 10,454,723
Accrued liabilities 7,653,208 6,812,223
Other current liabilities 5,406,072 2,111,687
Interest payable 8,583,882 8,005,079
Current portion of long-term debt 34,975,060 28,607,110
-------------- -------------
Total current liabilities 63,029,250 55,990,822
Long-term debt 218,236,839 250,669,286
Other liabilities 46,348,291 20,698,084
Limited Partners' interest in Orion Atlantic 10,130,058 14,626,338
Minority interest in other consolidated entities 54,008 52,354
Commitments and contingencies (Note 4)
Series A 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 15,000 shares authorized; 13,871 and 14,491
shares issued and outstanding at December 31, 1996 and 1995,
respectively, plus accrued dividends 16,097,880 15,705,054
Series B 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 5,000 shares authorized; 4,298 and 4,483 shares
issued and outstanding at December 31, 1996 and 1995,
respectively, plus accrued dividends 4,804,486 4,652,647
Stockholders' equity (deficit):
Common stock, $.01 par value; 40,000,000 shares authorized;
11,244,665 and 11,115,965 issued, 10,985,150 and 10,856,450 out-
standing at December 31, 1996 and 1995, respectively, less
259,515 held as treasury shares (at no cost) 112,447 111,160
Capital in excess of par value 86,932,391 85,485,613
Accumulated deficit (87,481,206) (58,916,131)
-------------- -------------
Total stockholders' equity (deficit) (436,368) 26,680,642
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 358,264,444 $ 389,075,227
============== =============
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1996 1995 1994
------------------ --------------- ------------------
<S> <C> <C> <C>
Service revenue $ 41,847,292 $ 22,283,882 $ 3,415,053
Operating expenses:
Direct 6,024,109 10,485,745 3,503,037
Sales and marketing 11,465,040 8,613,399 5,863,823
Engineering and technical services 8,672,943 8,539,644 3,004,144
General and administrative 15,089,800 10,072,429 5,058,201
Depreciation and amortization 36,948,158 31,403,376 1,716,019
------------------ --------------- ------------------
Total operating expenses 78,200,050 69,114,593 19,145,224
------------------ --------------- ------------------
Loss from operations (36,352,758) (46,830,711) (15,730,171)
Other expense (income):
Interest income (2,313,842) (1,924,822) (413,435)
Interest expense 27,764,126 24,738,446 60,559
Other 22,018 3,359,853 (54,737)
------------------ --------------- ------------------
Total other expense (income) 25,472,302 26,173,477 (407,613)
------------------ --------------- ------------------
Loss before minority interest (61,825,060) (73,004,188) (15,322,558)
Limited Partners' and minority interest in
the net loss of Orion Atlantic and other
consolidated entities 34,629,650 46,089,010 7,357,640
------------------ --------------- ------------------
Net loss (27,195,410) (26,915,178) (7,964,918)
Preferred stock dividend, net of forfeitures 1,369,665 1,329,007 626,400
------------------ --------------- ------------------
Net loss attributable to common stockholders $ (28,565,075) $ (28,244,185) $ (8,591,318)
================== =============== ==================
Net loss per common share $ (2.62) $ (3.07) $ (0.86)
================== =============== ==================
Weighted average common shares outstanding 10,951,823 9,103,505 9,272,166
================== =============== ==================
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------ Capital in Total
Number of Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity (Deficit)
-------------- -------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,583,994 $ 65,840 $ 30,414,374 $ (22,080,628) $ 8,399,586
Issuance of common stock 782,503 7,825 6,326,028 -- 6,333,853
Exercise of stock options 31,967 319 208,131 -- 208,450
Conversion of common stock to
redeemable preferred stock (352,941) (3,529) (2,996,471) -- (3,000,000)
Preferred stock dividend, net of
forfeitures -- -- -- (626,400) (626,400)
Net loss for 1994 -- -- -- (7,964,918) (7,964,918)
-------------- -------------- ------------- ------------- ----------------
Balance at December 31, 1994 7,045,523 70,455 33,952,062 (30,671,946) 3,350,571
Issuance of common stock 4,002,941 40,030 50,960,330 -- 51,000,360
Exercise of stock options and warrants 67,501 675 573,221 -- 573,896
Preferred stock dividend, net of
forfeitures -- -- -- (1,329,007) (1,329,007)
Net loss for 1995 -- -- -- (26,915,178) (26,915,178)
-------------- -------------- ------------- ------------- ----------------
Balance at December 31, 1995 11,115,965 111,160 85,485,613 (58,916,131) 26,680,642
Conversion of preferred stock to
common stock 91,071 911 804,034 -- 804,945
Issuance of stock warrants -- -- 300,000 -- 300,000
Exercise of stock options and warrants 37,629 376 342,744 -- 343,120
Preferred stock dividend, net of -- -- -- (1,369,665) (1,369,665)
forfeitures
Net loss for 1996 -- -- -- (27,195,410) (27,195,410)
-------------- -------------- ------------- ------------- ----------------
Balance at December 31, 1996 11,244,665 $ 112,447 $ 86,932,391 $ (87,481,206) $ (436,368)
============== ============== ============= ============= ================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
ORION NETWORK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Operating activities
Net loss $ (27,195,410) $ (26,915,178) $ (7,964,918)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 36,948,158 31,403,376 1,713,117
Amortization of deferred financing costs 2,130,588 2,130,588 --
Provision for bad debts 919,453 277,529 --
Satellite incentives and accrued interest 2,371,506 5,185,834 --
Limited Partners' and minority interest in the net loss
of Orion Atlantic and other consolidated entities (34,629,650) (46,089,010) (7,352,704)
Gain on sale of assets (54,738) (59,301) (54,737)
Changes in operating assets and liabilities:
Accounts receivable (2,203,171) (4,915,257) (426,281)
Accrued interest 50,481 (129,810) --
Prepaid expenses and other current assets (336,376) (3,017,782) 159,030
Other assets (69,708) (519,773) 321,443
Accounts payable and accrued liabilities (3,621,847) 7,327,377 535,092
Other current liabilities 3,296,913 3,670,988 --
Interest payable 578,803 (885,106) --
---------------- ---------------- -----------------
Net cash used in operating activities (21,814,998) (32,535,525) (13,069,958)
Investing activities
Capital expenditures (12,625,444) (8,549,799) (3,432,286)
Deferred revenue, net 9,900,000 -- --
Satellite construction costs (3,750,231) (510,613) (47,670,720)
Refund from satellite manufacturer -- 2,750,000 --
FCC license costs (37,865) (558,817) (96,030)
---------------- ---------------- -----------------
Net cash used in investing activities (6,513,540) (6,869,229) (51,199,036)
Financing activities
Limited Partners capital contributions 30,135,000 7,600,000 4,000,000
Redemption of limited partner interest -- (4,450,000) --
Expenditures on debt and equity financing costs (2,265,291) -- (409,181)
Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293
Proceeds from issuance of common stock and
subscriptions, net of issuance costs 343,120 51,974,436 6,542,303
PPU borrowings -- 2,275,000 4,375,000
Proceeds from issuance of notes payable -- 551,850 8,136,191
Proceeds from senior notes payable to banks -- 18,367,134 36,685,505
Payments of senior notes payable to banks (22,768,340) (12,468,049) --
Payments of notes payable (5,033,941) (1,916,966) --
Payments on capital lease obligations (755,995) (576,727) (252,823)
Capacity and other liabilities 15,750,207 17,483,733 2,101,168
Distributions to joint venture minority interest -- (25,904) (22,873)
---------------- ---------------- -----------------
Net cash provided by financing activities 15,404,760 83,297,508 72,083,583
---------------- ---------------- -----------------
Net (decrease) increase in cash and cash equivalents (12,923,778) 43,892,754 7,814,589
Cash and cash equivalents at beginning of period 55,111,585 11,218,831 3,404,242
---------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 42,187,807 $ 55,111,585 $ 11,218,831
================ ================ =================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Orion Network Systems, Inc. (Orion) was incorporated in the State of
Delaware on October 26, 1982 (inception) under the name Orion Satellite
Corporation, and in January 1988, changed its name to Orion Network Systems,
Inc. Orion has developed and operates an international satellite communications
system for use in private communications networks to multinational businesses
and transmission capacity for video and other program distribution services.
Orion has been financed by private and public equity and debt from individual
and corporate investors. Orion's first satellite (Orion 1) was successfully
launched on November 29, 1994. Orion took delivery of the Orion 1 satellite on
January 20, 1995. In August 1995, the Company completed its initial public
offering of common stock by selling 4,000,000 common shares at $14 per share.
Proceeds to the Company, net of underwriting discount, aggregated approximately
$52.25 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Orion, its
two wholly-owned subsidiaries OrionNet, Inc. (OrionNet) and OrionSat, its 83%
owned subsidiary, Asia Pacific Space and Communications Ltd. (Asia Pacific), the
Orion Financial Partnership, in which Orion holds a 50% interest, and Orion
Atlantic, in which Orion holds, at December 31, 1996, a 41 2/3% ownership
interest. Management control and direction of Orion Atlantic by OrionSat is a
requirement of the FCC in order for Orion Atlantic to continue to hold the
license authority received in June 1991. OrionSat, as the general partner of
Orion Atlantic, exercises such control through the provisions of the partnership
agreement. The amount reflected in the balance sheet as "Limited Partners'
interest in Orion Atlantic" represents amounts invested by entities other than
Orion (net of syndication costs related to the investments) adjusted for those
Limited Partners' share of operating results. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Orion considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
includes cash in banks and short term investments as follows:
DECEMBER 31,
----------------------------------
1996 1995
-------------- -----------------
Cash....................... $ 2,627,477 $ 3,091,277
Money market funds......... 14,213,484 6,018,925
Commercial paper........... 25,346,846 34,612,175
FHLMC discount notes....... -- 11,389,208
-------------- -----------------
$ 42,187,807 $ 55,111,585
============== =================
The commercial paper held at December 31, 1996 matures between January and March
1997.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are calculated using the straight-line method over their estimated useful lives
as follows:
Satellite and related equipment.............. 10.5 years
Telecommunications equipment................. 2-7 years
Furniture and computer equipment............. 2-7 years
Costs incurred in connection with the construction and successful
deployment of the Orion 1 satellite and related equipment are capitalized. Such
costs include direct contract cost, allocated indirect costs, launch costs,
launch insurance, construction period interest and the present value of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite construction in progress". Orion began depreciating the Orion 1
satellite over its estimated useful life commencing on the date of operational
delivery in orbit (January 20, 1995).
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The effect of adoption was not material.
13
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs related to obtaining debt and Orion's share of
equity financing for Orion Atlantic are amortized over the period the debt is
expected to be outstanding. Accumulated amortization at December 31, 1996 and
1995 was $9,122,000 and $6,991,000, respectively. Amortization through January
1995 was capitalized as part of the cost of the satellite. Costs of
approximately $3.4 million relating to a debt offering that was postponed in
November 1995 have been charged to "Other" expense.
OTHER ASSETS
Other assets consist principally of FCC license application costs,
organization costs and goodwill. The Company began amortizing FCC license
application costs related to Orion 1 in January 1995 over the estimated useful
life of the satellite. Organization costs and goodwill are amortized over five
and ten years respectively. Accumulated amortization at December 31, 1996 and
1995 was $3,150,000 and $3,069,000, respectively.
INTEREST RATE MODIFICATION AGREEMENTS
Orion may, from time to time, enter into interest-rate swap and cap
agreements to modify the interest characteristics of its outstanding debt from a
floating to a fixed-rate basis. These agreements involve the receipt of floating
rate amounts in an exchange for fixed-rate interest payments over the life of
the agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counterparties is included in interest
payable. The fair values of the swap agreements are not recognized in the
financial statements.
REVENUE RECOGNITION
Orion's revenue results from providing telecommunications and related
services. Revenue is recognized as earned in the period in which services are
provided.
The following summarizes the Company's domestic and foreign revenues for
the year ended December 31, 1996 and 1995:
Year ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Revenues from unaffiliated customers
United States....................... $ 21,261,980 $ 8,528,736
Europe.............................. 14,571,979 8,056,146
Revenues from related parties........... 6,013,333 5,699,000
-------------- ----------------
Total services revenue.................. $ 41,847,292 $ 22,283,882
============== ================
14
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect
when the difference is expected to reverse.
Following is a summary of the components of the net deferred tax asset at
December 31, 1996 and 1995 (in thousands):
December 31,
1996 1995
---------------- ----------------
Tax benefit of temporary differences:
Net operating loss carryforward $ 29,535 $ 19,463
Orion Atlantic losses.......... 182 1,237
Other.......................... 2,427 1,056
---------------- ----------------
Total.......................... 32,144 21,756
Valuation allowance............ (32,144) (21,756)
---------------- ----------------
Net deferred tax asset......... $ -- $ --
================ ================
At December 31, 1996, Orion has approximately $77.7 million in net
operating loss carryforwards which expire at varying dates from 2004 through
2011. The use of these loss carryforwards may be limited under the Internal
Revenue Code as a result of ownership changes experienced by Orion. Due to
uncertainty regarding its ability to realize the benefits of such net operating
loss carryforwards, the Company has established a valuation allowance for the
full amount of its net operating loss carryforwards.
NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. Pursuant to the requirements of the
Securities and Exchange Commission, common stock issued and stock issuable
relating to convertible preferred stock, warrants and options granted within one
year of filing the registration statement relating to the Company's initial
public offering of common stock were treated as outstanding for all periods
prior to the second quarter of 1995.
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information includes:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Satellite construction costs financed by notes payable $ -- $ -- $ 7,862,050
Conversion of common stock to redeemable
preferred stock....................................
Property and equipment financed by capital leases.... 482,452 2,850,766 94,323
Preferred stock dividend, net of forfeitures......... 1,369,665 1,329,007 626,400
Conversion of preferred stock to common stock........ 804,945 9,000 --
Premium on satellite due to redemption of L.P. interest -- 3,066,925 --
Redemption of STET interest with notes payable....... -- 8,000,000 --
Reduction in amount due to satellite manufacturer.... -- 485,799 --
Satellite incentive obligation capitalized........... -- 14,816,406 --
Interest paid during the year, net of amounts
capitalized.......................................... 20,619,316 11,312,875 45,051
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
15
<PAGE>
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ORION ATLANTIC
Orion Atlantic is a Delaware limited partnership formed to provide
international private communications networks and basic transponder capacity and
capacity services (including ancillary ground services) to businesses and
institutions with trans-Atlantic and intra-European needs. The business was
organized by OrionSat, the general partner of Orion Atlantic. The principal
purposes of Orion Atlantic were to finance the construction, launch and
operation of up to two telecommunications satellites in geosynchronous orbit
over the Atlantic Ocean and to establish a multinational sales and service
organization. Eight international corporations, including Orion, invested a
total of $90 million in equity as limited partners in Orion Atlantic. Orion
Atlantic also has a credit facility which provided up to $251 million for the
first satellite from a syndicate of major international banks led by Chase
Manhattan Bank, N.A. In addition to their equity investments, the Limited
Partners have agreed to lease capacity on the satellites up to an aggregate $155
million and have entered into additional contingent capacity lease contracts
("contingent call") up to an aggregate $271 million, as support for repayment of
the senior debt. The firm capacity leases and contingent calls are payable over
a seven-year period after the first satellite is placed in service. In July
1995, January and July 1996 the Limited Partners (excluding the Company) paid
$7.6 million, $18.0 million and $12.1 million, respectively, pursuant to the
contingent calls.
Satellite Construction Contract --The fixed base price of Orion 1,
excluding obligations relating to satellite performance, aggregated $227
million. In addition to the fixed base price, the contract requires payments in
lieu of a further contract price increase, aggregating approximately $44 million
through 2006. Such payments are due, generally, if 24 out of 34 satellite
transponders are operating satisfactorily. Shortly after acceptance of the
satellite in January 1995, the Company filed a warranty claim with the satellite
manufacturer relating to one transponder that was not performing in accordance
with contract specifications. In August 1995, Orion Atlantic received a one time
refund of $2.75 million which was applied as a mandatory prepayment to the
senior notes payable - banks.
The Company believes that since Orion 1 is properly deployed and
operational, based upon industry data and experience, payment of the obligation
mentioned above is highly probable and the Company has capitalized the present
value of this obligation of approximately $14.8 million as part of the cost of
the satellite. Payment of amounts due under this obligation are delayed until
payment is permitted under the senior notes payable -- banks. The present value
was estimated by discounting the obligation at 14% over the expected term,
assuming payment of the incentives begins upon expiration of the senior notes
payable -- banks in 2002.
Partnership and Limited Partners -- OrionSat has the primary responsibility
for the control, management and operations of Orion Atlantic. Under the
partnership agreement, the limited partners have rights of approval for a
limited number of matters, e.g., terms for acceptance of new partners,
significant budget modifications, and certain borrowings. The financing and
legal structure of Orion Atlantic restricts the use of partnership resources to
the purposes of constructing, launching and operating the satellite system.
Condensed balance sheet information for Orion Atlantic at December 31, 1996
and 1995 is as follows:
December 31,
----------------------------------
1996 1995
--------------- ----------------
Assets
Current assets........................... $ 14,959,986 $ 14,085,169
Property and equipment, net.............. 285,006,166 303,889,894
Deferred financing costs and other....... 12,773,951 16,051,517
--------------- ----------------
Total assets........................ $ 312,740,103 $ 334,026,580
=============== ================
Liabilities and partnership capital
Current liabilities...................... $ 59,139,777 $ 52,883,250
Long-term debt and other liabilities..... 274,732,228 284,110,104
Partnership capital subject to redemption -- --
Partnership (deficit) capital............ (19,081,902) 1,533,226
Less: Orion Network Systems, Inc. note.. (2,050,000) (4,500,000)
--------------- ----------------
Total liabilities and partnership
capital......................... $ 312,740,103 $ 334,026,580
================ ===============
16
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ORION ATLANTIC (CONTINUED)
Redemption of STET Partnership Interest; Issuance of New Interest to
Orion. -- In November 1995 Orion Atlantic redeemed the limited partnership
interest held by STET (the "STET Redemption"). Such redemption was for $11.5
million, including $3.5 million of cash and $8.0 million in 12%, promissory
notes due through 1997. STET's firm and contingent capacity leases remain in
place until released by the Banks under the Orion 1 Credit Facility. STET's
existing contractual arrangements with Orion Atlantic have been modified in a
number of respects, including (i) a reduction of approximately $3.5 million in
amounts due by Orion Atlantic to Telespazio S.p.A., an affiliate of STET, over a
ten-year period under contracts relating to the construction of Orion 2, back-up
tracking, telemetry and command services through a facility in Italy and
engineering consulting services, (ii) the establishment of ground operations and
distribution agreements between Orion Atlantic and Telecom Italia, a subsidiary
of STET, relating to Italy, and the granting to Telecom Italia of exclusive
marketing rights relating to Italy for a period ending December 1998 conditioned
upon Telecom Italia achieving certain sales quotas, and (iii) canceling
exclusive ground operations and sales representation agreements between Orion
Atlantic and STET (or its affiliates) relating to Eastern Europe.
Orion Atlantic funded the STET Redemption by selling a new limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12% promissory notes due through 1997). In connection with the
STET redemption, Orion agreed to indemnify Telecom Italia for payments which
were made in July 1995 of $950,000 and which would be made in the future under
its firm and contingent capacity agreements with Orion Atlantic and posted a $10
million letter of credit to support such indemnity. The Company has accounted
for this transaction as an acquisition of a minority interest and, as a result,
approximately $3.1 million was allocated to the cost of the satellite and
related equipment.
During 1995, Orion Atlantic entered into agreements with certain Limited
Partners (including the Company) under which the participating Limited Partners
would voluntarily give up their rights to receive capacity under their firm
capacity agreements through January 1996. The participating Limited Partners
would continue to make payments for such capacity but would have the right to
receive refunds from Orion Atlantic out of cash available after operating costs
and payments under the Credit Facility. Through December 31, 1996 and 1995,
Orion Atlantic has received $27.7 million and $14.1 million (excluding payments
from the Company) under the firm capacity agreements subject to refund, which
amounts are included in "Other liabilities." In addition, services revenue
included $6.0 million and $5.7 million in 1996 and 1995 from Limited Partners
pursuant to the firm capacity commitments, not subject to refund.
4. COMMITMENTS AND CONTINGENCIES
Obligations with Respect to Orion Atlantic -- Orion has certain significant
obligations to Orion Atlantic and the Limited Partners, including commitments
under satellite capacity agreements between Orion and Orion Atlantic, under
which Orion will be liable to pay Orion Atlantic approximately $2.5 million per
year for seven years for satellite capacity and is contingently liable for up to
an additional $4.3 million per year for up to seven years if Orion Atlantic
experiences cash flow deficits not outstanding at December 1997 commencing when
Orion Atlantic's first satellite begins commercial operations; and reimbursement
(jointly and severally with OrionSat) with respect to a $10 million letter of
credit provided by OrionSat to a limited partner, which is secured by 259,515
shares of Orion's common stock held in treasury and cash distributions that
Orion and OrionSat may receive with respect to their partnership interests in
Orion Atlantic.
Orion 1 satellite -- In November 1995, a portion of the Orion 1 satellite
experienced an anomaly that resulted in a temporary service interruption,
lasting approximately two hours, in the dedicated capacity serving the European
portion of Orion Atlantic's services. The nine affected transponders account for
a majority of Orion Atlantic's present revenues. Full service to all affected
customers was restored using redundant equipment on the satellite. Orion
Atlantic believes, based on the data and the Telesat Report (issued by Telesat
Canada, independent engineering consultants dated November 14, 1995), that,
because the redundant component is functioning fully in accordance with
specifications and the performance record of similar components is strong, the
anomalous behavior is unlikely to affect the expected performance of the
satellite over its useful life. Furthermore, there has been no effect on Orion
Atlantic's ability to provide services to customers. However, in the event that
the currently operating component fails, Orion 1 would experience a significant
loss of usable capacity. In such event, while Orion Atlantic would be entitled
to insurance proceeds of approximately $50 million and could lease replacement
capacity and function as a reseller with respect to such capacity (at reduced
levels of profitability), the loss of capacity would have a material adverse
effect on Orion and on Orion Atlantic.
Orion 2 satellite -- July 1996, the Company signed a contract with Matra
Marconi Space for the construction and launch of Orion 2 (which was amended and
restated in January 1997) and in February 1997 commenced construction of that
satellite. The contract provides for delivery in orbit of Orion 2 by June 1999,
for a firm fixed price of $201 million, excluding launch insurance. Orion 2 will
expand the Company's European coverage and extend coverage to portions of the
Commonwealth of Independent States, Latin American and the Middle East.
Orion 3 -- In January 1997, the Company entered into a satellite
procurement contract with Hughes Space for the construction and launch of Orion
3, construction of which commenced in December 1996. The contract provides for
delivery in orbit of Orion 3 by December 1998, for a firm fixed price of $208
million, excluding launch insurance. Orion 3 will cover broad areas of the Asia
Pacific region including China, Japan, Korea, Southeast Asia, Australia, New
Zealand, Eastern Russia and Hawaii.
17
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"),
a Korean communications company, under which DACOM will lease eight dedicated
transponders on Orion 3 for 13 years, in return for approximately $89 million,
which is payable over a period from December 1996 through six months following
the lease commencement date for the transponders (which is scheduled to occur by
January 1999). DACOM is to deposit funds with Orion in accordance with a
milestone schedule. In December 1996, Orion received a $10 million deposit and
such amount is included in "Other liabilities". Orion maintains a $10 million
letter of credit which increases as DACOM makes additional deposits. DACOM has
the right to terminate the contract at any time prior to March 31, 1997, upon
which termination Orion would be entitled to retain all deposited funds. Prior
to launch, payments will be held in escrow and are subject to refund pending the
successful launch and commencement of commercial operation of Orion 3.
Eutelsat Lease -- In January 1993, Orion Atlantic entered into a lease,
which expired in December 1994, with one of its limited partners under which
Orion Atlantic leased one-half of a transponder on a EUTELSAT satellite for use
in providing private network services prior to the operational delivery of Orion
1. The lease required quarterly payments of $481,000 of which $855,000 was
deferred by the limited partner until March 1995. Rent under this lease totaled
$1.9 million in 1994.
Litigation -- In October 1995, Skydata Corporation ("Skydata"), a former
contractor, filed suit against Orion Atlantic, Orion Satellite Corporation and
Orion, in the United States District Court for the Middle District of Florida,
claiming that certain Orion Atlantic operations using frame relay switches
infringe a Skydata patent. Skydata's suit sought damages in excess of $10
million and asked that any damages assessed be trebled. On December 11, 1995,
the Orion parties filed a motion to dismiss the lawsuit on the grounds of lack
of jurisdiction and violation of a mandatory arbitration agreement. In addition,
on December 19, 1995, the Orion parties filed a Demand for Arbitration against
Skydata with the American Arbitration Association in Atlanta, Georgia,
requesting damages in excess of $100,000 for breach of contract and
declarations, among other things, that Orion and Orion Atlantic own a
royalty-free license to the patent, that the patent is invalid and unenforceable
and that Orion and Orion Atlantic have not infringed on the patent. On March 5,
1996, the court granted the Company's motion to dismiss the lawsuit on the basis
that Skydata's claims are subject to arbitration. Skydata appealed the dismissal
to the United States Court of Appeals for the Federal Circuit. Skydata also
filed a counterclaim in the arbitration proceedings asserting a claim for $2
million damages as a result of the conduct of Orion and its affiliates. On May
15, 1996, the arbitrator granted the Orion parties' request for an initial
hearing on claims relating to the Orion parties' rights to the patent, including
the co-ownership claim and other contractual claims. This initial hearing was
scheduled to take place in November 1996. On November 9, 1996, Orion and Skydata
executed a letter to settle in full the pending litigation and arbitration. As
part of the settlement, the parties are to release all claims by either side
relating in any way to the patent and/or the pending litigation and arbitration.
In addition, Skydata is to grant Orion (and its affiliates) an unrestricted
paid-up license to make, have made, use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion is to
pay Skydata $437,000 over a period of two years as part of the settlement. The
parties are in the process of documenting the final terms in a formal settlement
agreement.
While Orion is party to regulatory proceedings incident to the business of
Orion, there are no other material legal proceedings pending or, to the
knowledge of management, threatened against Orion or its subsidiaries.
Other -- Orion has entered into operating leases, principally for office
space. Rent expense was $915,000, $735,000 and $668,000 during the years ended
December 31, 1996, 1995, and 1994, respectively.
Future minimum lease payments are as follows:
1997...................... $ 1,073,582
1998...................... 969,302
1999...................... 989,640
2000...................... 13,694
------------
$ 3,046,218
============
18
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
See Note 9 for discussion of significant financing transactions that were
consummated on January 31, 1997.
Long-term debt at December 31, 1996 and 1995, consists of the following:
December 31,
-----------------------------
1996 1995
------------ --------------
Senior notes payable - banks............ $207,714,842 $ 230,483,182
Note payable - TT&C Facility............ 6,956,624 8,774,266
Satellite incentive obligation.......... 22,373,746 20,002,240
Notes payable - STET.................... 5,550,000 8,000,000
Note payable - Limited Partners......... 8,050,000 8,050,000
Other .................................. 2,566,687 3,966,708
------------ --------------
Total long-term debt.................... 253,211,899 279,276,396
Less: current portion................... 34,975,060 28,607,110
------------ --------------
Long-term debt less current portion..... $218,236,839 $ 250,669,286
============ ==============
Total interest (including commitment fees and amortization of deferred financing
costs) incurred for the years ended December 31, 1996, 1995 and 1994 was $27.8,
$26.0, and $27.0 million, respectively. Substantially all of the interest
incurred in 1994 was capitalized and $1.3 million was capitalized in 1995.
Aggregate annual maturities of long-term debt consist of the following (in
thousands):
1997.................. $ 34,964
1998.................. 34,422
1999.................. 46,914
2000.................. 43,619
2001.................. 47,317
Thereafter............ 45,976
---------------
$ 253,212
===============
Senior Notes Payable to Banks -- In December 1991, OrionSat, on behalf of
Orion Atlantic, executed a credit agreement for up to $400 million of senior
debt from an international banking syndicate. Amounts advanced under the credit
facility are secured by the assets of Orion Atlantic and are due over seven
years in graduated installments beginning July 31, 1995. The credit agreement
prohibits the extension of credit by Orion Atlantic to any affiliate of the
partnership, as defined. Accordingly, Orion Atlantic may not loan or advance
funds to the Company or its affiliates. The credit agreement also restricts
distributions to the partners. At December 31, 1996, none of Orion Atlantic's
capital was available for distribution. The credit facility has a number of
other customary covenants and requirements, including the Banks' approval of
significant changes to the construction contract and increases in budgeted
costs. The Banks also have full recourse to OrionSat as general partner, and
Orion has pledged its investment in the common stock of OrionSat and its limited
partner ownership interest to the Banks.
Amounts outstanding under the credit facility bear interest at 1.75% over
the LIBOR (7.6% at December 31, 1996). Orion Atlantic has entered into
agreements with Chase Manhattan Bank, N.A. ( "Chase" ) for interest rate hedging
arrangements which fixed the maximum interest rate through November 1995 at
11.54%. Thereafter a self funding interest rate cap agreement is in place
relating to a notional amount declining every six months from $150 million
effective November 30, 1995 to $15.6 million effective March 31, 2001. Under the
terms of the cap agreement, when LIBOR equals or exceeds 5.5% Orion Atlantic
pays Chase a fee equal to 3.3% per annum of the notional amount and receives a
payment from Chase in an amount equal to the difference between the actual LIBOR
rate and 5.5% on the notional amount. There was an unrealized loss at December
31, 1996 and 1995 of approximately $6.4 million and $4.6 million relating to
this arrangement.
19
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG TERM DEBT (CONTINUED)
Note Payable -- TT&C Facility -- Orion Atlantic entered into a financing
arrangement with General Electric Capital Corporation ("GECC") to finance the
Tracking Telemetry and Control ("TT&C") Facility. The TT&C arrangement calls for
a note payable, the maximum amount of which is $11 million of which up to $8.9
million is for payment to Lockheed Martin under the Satellite Control System
Contract, with the remaining balance available to be drawn to finance the cost
of launch insurance required for the benefit of GECC. In June 1995, Orion
Atlantic accepted the TT&C Facility and Orion Atlantic refinanced $9.3 million
from GECC as a seven-year term loan, payable monthly. Orion Atlantic made a
mandatory prepayment of $1 million in January 1996. The interest rate is fixed
at 13.5%.
The TT&C debt is secured by the TT&C Facility, the Satellite Control System
Contract and Orion Atlantic's leasehold interest in the TT&C Facility land. The
TT&C financing agreement contains similar representations, warranties and
covenants to those in the senior notes.
Satellite incentive obligation -- The obligations relating to satellite
performance have been recorded at the present value (discounted at 14%, the
Company's estimated incremental borrowing rate for unsecured financing) of the
required payments commencing at the maturity of the senior notes payable to
banks and continuing through 2006. Under the terms of the construction contract,
payment of the obligation is delayed until such time as payment is permitted
under the senior notes payable to banks.
Notes Payable -- STET -- In connection with the STET Redemption, the
Company issued STET $8 million of promissory notes which bear interest at 12%
per annum. Payments are due as follows: $2.5 million plus accrued interest paid
on December 31, 1996; $3.5 million plus accrued interest on the earlier of
December 31, 1997 or the refinancing of the senior notes payable to banks; and
the remaining $2.0 million in monthly installments of $0.2 million plus accrued
interest beginning January 1997.
Notes Payable -- Limited Partners -- In 1993, Orion Atlantic received
commitments for Preferred Participation Units (PPUs) aggregating $9.6 million
from certain Limited Partners (including $1.5 million from Orion Network
Systems) for development of Orion Atlantic's network services business. Holders
of PPUs earn interest on aggregate amounts drawn at the rate of 30% per annum,
of which 6% is paid and the remainder accrued, but not paid until July 1, 1995,
at which time interest and principal payments due are subordinated to operating
requirements and senior notes debt service but are payable prior to
distributions to Limited Partners. Principal amounts drawn are payable on
February 1, 1999. Principal amounts may be prepaid without penalty on or after
January 1, 1996. Interest payable at December 31, 1996 and 1995 is $5.9 million
and $3.5 million and is included in "Other liabilities".
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
See Note 9 for discussion of significant equity transactions that were
consummated on January 31, 1997.
The Company has authorized 1,000,000 shares of $0.01 par value preferred
stock.
Redeemable Preferred Stock
In June 1994, Orion issued 11,500 shares of Series A 8% Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar preferred stock at $1,000 per
share. Dividends on preferred stock accrue at 8% per year and are payable as and
when declared. Orion may redeem the preferred stock at the amount invested plus
accrued and unpaid dividends. Upon such a redemption, the preferred stockholders
would receive a warrant to acquire at $8.50 per share the number of shares of
common stock into which the preferred stock was convertible. The 11,500 shares
issued are convertible into 1,352,941 shares of common stock ($8.50 per share).
Upon conversion any accrued and unpaid dividends are forfeited. Orion may
require conversion of the preferred stock beginning in June 1996 if certain
conditions are met. After Orion issued preferred stock (along with warrants and
options to make an additional investment) in June 1994, the Directors and
affiliates of Directors who purchased common stock in December 1993 and the
institutions and other investors who purchased common stock in June 1994 each
exercised its right to receive preferred stock (along with warrants and options
to make an additional investment) in exchange for the common stock previously
acquired and Orion issued an aggregate of 3,000 shares of Series A Preferred
Stock and related options for 1,000 shares to such persons and entities. The
3,000 shares issued are convertible into 352,941 shares of common stock ($8.50
per share). Through December 31, 1996, 629 shares of preferred stock were
converted into 74,000 shares of common stock. The remaining 13,871 shares issued
are convertible into 1,631,882 shares of common stock and the preferred stock
underlying the options are convertible into 25,894 shares of common stock.
20
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The preferred stock has a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders are entitled
to vote on an as-converted basis and have the right to put the stock to Orion
upon a merger, change of control or sale of substantially all assets at the
greater of liquidation value or fair value. The put expires upon the completion
of a qualified public equity offering, as defined. If the preferred stock is not
previously redeemed or converted to common stock, the preferred stockholders
also have the right to put the stock to Orion as follows: 33 1/3% beginning in
June 1999; 66 2/3% beginning in June 2000; and 100% beginning in June 2001.
In June 1995, certain Directors, affiliates of Directors, and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for approximately $4.5 million. This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred stock similar to the Series A
Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar preferred stock would be convertible at any time with
Common Stock at a price within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised. The Series B Preferred Stock has
rights, designations and preferences substantially similar to those of the
Series A Preferred Stock, and is subject to similar covenants, except that the
Series B Preferred Stock is convertible into 439,510 shares of Common Stock at
an initial price of $10.20 per share, subject to certain anti-dilution
adjustments, and purchases of Series B Preferred Stock did not result in the
purchaser receiving any rights to purchase additional preferred stock. Through
December 31, 1996, 185 shares of preferred stock were converted into 18,137
shares of common stock.
Stockholders' Equity
Stock Options -- In 1987, Orion adopted a stock option plan. Under this
plan, as amended, 1,470,588 shares of common stock are reserved for issuance
upon exercise of options granted. Shares of common stock may be purchased under
this plan at prices not less than the fair market value, as determined by the
Board of Directors, on the date the option is granted. The Board of Directors
also has granted nonqualified options to purchase 53,341 shares of common stock
outside the plan described at prices ranging from $5.44 to $12.24 per share.
Stock options outstanding at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Range of exercise price........... $ 8.16 - 12.24 $ 5.44 - 12.24 $ 5.44 - 12.24
--------------- --------------- ----------------
Outstanding of beginning of year 971,469 804,056 871,464
Granted during year............... 122,750 380,069 37,867
Exercised......................... (37,629) (60,928) (31,967)
Canceled ......................... (144,927) (151,728) (73,308)
--------------- --------------- ----------------
Outstanding at end of year........ 911,663 971,469 804,056
=============== =============== ================
</TABLE>
In November 1993, stock options for 95,588 shares of common stock were
granted to key executives which may be exercised only upon the achievement of
certain business and financial objectives. At December 31,1995, the executives
had earned the right to exercise 40,441 of these options based on the
achievement of such objectives. The remaining options were canceled during 1996.
Stock options vest annually over a one to five-year period. All options are
exercisable up to seven years from the date of grant. There are 558,925 shares
available to be granted under the plan. As of December 31, 1996 and 1995,
429,265 and 356,226, respectively, qualified and nonqualified options were
exercisable.
In July 1996, the Company granted, subject to shareholder approval, the
Chairman of the Executive Committee 100,000 options at $9.83 per share. These
options vest as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion of either a refinancing of the Orion 1 satellite, financing for
construction, launch and insurance for Orion 2 or Orion 3 or completes a
substantial acquisition or relationship with a strategic partner. These
requirements were met in January 1997.
Non-Employee Director Stock Option Plan -- In 1996, Orion adopted a
non-employee director stock option plan. Under this plan, 380,000 shares of
common stock are reserved for issuance. During 1996, there were 190,000 options
granted pursuant to this plan at $8.49 to $12.53 per share.
21
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock based award
programs, because the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") which
is effective for awards after January 1, 1996 requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the employee award equals the market price of
the underlying stock on the date of grant, as has been the case historically
with the Company's awards, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of that statement. The fair
value of these options was estimated at the date of the grant using a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 6.5%, dividend yield of 0%, volatility factor of the expected market
price of the Company's common stock of 68% and a weighted-average expected life
of the option of 5.8 years. For purposes of pro forma disclosure, the estimated
fair value of the options is amortized to expense over the options' vesting
period. For the years ended December 31, 1996 and 1995, the Company's pro forma
net loss and net loss per share would have been $28.0 million or $2.68 per
share, and $27.3 million or $3.11 per share, respectively.
401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k)
profit sharing plan. Under this plan, 100,000 shares of common stock are
reserved for issuance as the Company's discretionary match of employee
contributions. The Company's matching contributions may be made in either cash
or in the equivalent amount of the Company's common stock.
Stock Purchase Plan -- In September 1996, Orion adopted an employee stock
purchase plan. Under this plan, 500,000 shares of common stock are reserved for
issuance. Shares of common stock purchased under this plan through payroll
deduction. The purchase price of each share of common stock purchased under the
plan will be 85% of the fair market value of the common stock on the measurement
date.
Stock Warrants -- In November 1996, Orion granted 50,000 warrants to DACOM
to purchase shares of common stock at $14 per share. The warrants are
exercisable for a six month period beginning six months after the commencement
date, as defined in the Joint Investment Agreement, and ending one year after
the commencement date and will terminate at that time or at any time the Joint
Investment Agreement is terminated. The fair value of the warrant at the date of
issue was $300,000 and was estimated using a Black-Scholes valuation model.
Stock warrants outstanding at December 31, 1996 and 1995 were 142,115 and
553,768, respectively. Outstanding warrants are exercisable at $9.79 to $14 per
share. Warrants totaling 461,653 expired during the year ended December 31,
1996. In January 1997, British Aerospace exercised 86,505 warrants to purchase
shares of common stock at $11.56 per share.
The holders of preferred stock also hold warrants to purchase 1,631,882
shares of common stock at the conversion price of such preferred stock. These
warrants do not become exercisable unless Orion exercises its right to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends.
Reserve for Issuance - The Company has 24,125,482 shares of common stock at
December 31, 1996 reserved for issuance upon conversion of preferred stock,
exercise of outstanding stock options and warrants, and common stock issued
under the stock purchase and 401(k) profit sharing plans.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the senior notes payable to banks, Orion
believes that the carrying amount reported in the balance sheet of its other
financial assets and liabilities approximates their fair value. The fair value
of Orion Atlantic's senior notes payable to banks at December 31, 1996 and 1995
was estimated to be $214.1 million and $235.1 million based on the principal
balance outstanding, net of the estimated fair value of the interest rate
modification agreement, which approximates an implicit loss of $6.4 million and
$4.6 million, respectively. Credit risk exists if the counterparty is not able
to make the required payments to Orion under these agreements. Orion believes
the risk to be remote.
22
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONDENSED FINANCIAL INFORMATION OF ORION
The net assets, credit facilities and other resources of Orion Atlantic are
restricted to the construction and operation of the satellite system. Presented
below are condensed balance sheets of Orion (parent company only basis) at
December 31, 1996 and 1995 and condensed statements of operations and cash flows
for the years ended December 31, 1996, 1995 and 1994. All material
contingencies, obligations and guarantees of Orion have been separately
disclosed in the preceding notes to the financial statements.
CONDENSED BALANCE SHEETS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
December 31,
1996 1995
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 26,564,562 $ 48,797,627
Receivable from Orion Atlantic.............................. 253,088 1,217,169
Other current assets........................................ 766,784 611,391
--------------- ----------------
Total current assets................................... 27,584,434 50,626,187
Investment in and advances to subsidiaries:
OrionNet.................................................... 8,331,248 5,993,628
OrionSat.................................................... (35,336,290) (20,496,009)
Asia Pacific................................................ 1,397,588 1,634,048
Orion Asia Pacific.......................................... 4,324,426 --
Orion Atlantic.............................................. 9,194,820 10,585,573
Other assets.................................................. 10,590,071 6,256,742
--------------- ----------------
Total assets........................................... $ 26,086,297 $ 54,600,169
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and interest payable to Orion Atlantic................ $ 2,327,427 $ 2,482,667
Accounts payable and accrued liabilities.................... 2,828,616 2,361,291
--------------- ----------------
Total current liabilities.............................. 5,156,043 4,843,958
Notes and interest payable to Orion Atlantic.................. -- 2,077,327
Other liabilities............................................. 464,256 640,541
Redeemable preferred stock.................................... 20,902,366 20,357,701
Stockholders' equity (deficit)................................ (436,368) 26,680,642
--------------- ----------------
Total liabilities and stockholders' equity............. $ 26,086,297 $ 54,600,169
=============== ================
</TABLE>
23
<PAGE>
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONDENSED FINANCIAL INFORMATION OF ORION (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
<S> <C> <C> <C>
Services revenue..................................... $ 34,000 $ -- $ --
Operating expenses and other income:
General and administrative........................ 3,832,286 3,171,305 2,487,201
Interest income, net.............................. (1,883,719) (1,834,589) (243,152)
--------------- --------------- ----------------
Total operating expenses and other income......... 1,948,567 1,336,716 2,244,049
Equity in net losses of subsidiaries................. 25,280,843 25,578,462 5,720,869
--------------- --------------- ----------------
Net loss............................................. $ (27,195,410) $ (26,915,178) $ (7,964,918)
=============== =============== ================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS OF ORION NETWORK SYSTEMS, INC.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net cash used in operations...................... $ (4,046,446) $ (4,107,237) $ (2,709,307)
Investing activities:............................
Advances to subsidiaries....................... (6,918,710) (3,264,024) (2,973,264)
Investment in Orion Atlantic................... (8,610,000) (5,400,000) --
Capital expenditures........................... (504,729) (597,698) (771,890)
---------------- ---------------- ---------------
Net cash used in investing activities.......... (16,033,439) (9,261,722) (3,745,154)
Financing activities:
Proceeds from issuance of redeemable preferred stock -- 4,483,001 10,928,293
Proceeds from issuance of common stock......... 343,120 51,974,436 6,542,303
PPU funding.................................... -- (455,000) (765,000)
Repayment of notes payable..................... (2,496,300) (37,792) (5,648,535)
---------------- ---------------- ---------------
Net cash (used in) provided by financing activities (2,153,180) 55,964,645 11,057,061
---------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents (22,233,065) 42,595,686 4,602,600
Cash and cash equivalents at beginning of year... 48,797,627 6,201,941 1,599,341
---------------- ---------------- ---------------
Cash and cash equivalents at end of year......... $ 26,564,562 $ 48,797,627 $ 6,201,941
================ ================ ===============
</TABLE>
Basis of presentation -- In these parent company-only condensed financial
statements, Orion's investment in subsidiaries is stated at cost less equity in
the losses of subsidiaries since date of inception or acquisition.
24
<PAGE>
ORION NETWORK SYSTEMS, INC. -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED)
THE EXCHANGE
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in Orion Atlantic. Specifically, the
Company acquired the Orion Atlantic limited partnership interests and other
rights relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners").
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged (the "Exchange") their
Orion Atlantic limited partnership interests for 123,172 shares of a newly
created class of the Company's Series C 6% Cumulative Convertible Redeemable
Preferred Stock (the "Series C Preferred Stock"). In addition, the Company
acquired certain rights held by certain of the Exchanging partners, including
certain of the Exchanging Partners' rights to receive repayment of various
advances. The 123,172 shares of Series C Preferred Stock issued in the Exchange
are convertible (as of January 31, 1997) into approximately 7 million shares of
the Company's common stock. As a result of the Exchange, certain of the
Exchanging Partners became principal stockholders of the Company.
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Orion Asia Pacific Corporation
from British Aerospace Satellite Investments, Inc. on January 8, 1997 (in
exchange for approximately 86,000 shares of the Company's Common Stock) results
in the Company owning 100% of all its significant subsidiaries and, therefore, a
greatly simplified corporate structure.
THE MERGER
The Exchange was conducted on a tax-free basis by means of a Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion became a wholly owned subsidiary of the Company (the "Merger"). On January
31, 1997, the effective time of the Merger, all of the stockholders of Old Orion
received stock in the Company with substantially identical rights to the Old
Orion stock they held prior to the effective time of the Merger. Following the
Merger, the Company changed its name from Orion Newco Services, Inc. to Orion
Network Systems, Inc. and the Company's wholly owned subsidiary Orion Network
Systems, Inc. changed its name to Orion Oldco Services, Inc.
THE FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Offering") comprised of approximately $445 million of Senior Note Units,
each of which consists of one 11.25% Senior Note due 2007 (a "Senior Note") and
one Warrant to purchase 0.8463 shares of common stock, par value $ .01 per share
("Common Stock") of the Company (a "Senior Note Warrant"), and approximately
$265.4 million of Senior Discount Note Units, each of which consists of one
12.5% Senior Discount Note due 2007 (a "Senior Discount Note," and together with
the Senior Notes, the "Notes") and one Warrant to purchase 0.6628 shares of
Common Stock of the Company (a "Senior Discount Note Warrant," and together with
the Senior Note Warrants, the "Warrants"). Interest on the Senior Notes will be
payable semi-annually in cash on January 15 and July 15 of each year, commencing
July 15, 1997. The Senior Discount Notes will not pay cash interest prior to
January 15, 2002. Thereafter, cash interest will accrue until maturity at an
annual rate of 12.5% payable semi-annually on January 15 and July 15 of each
year, commencing July 15, 2002. The exercise price for the Warrants is $ .01 per
share of Common Stock of the Company. The shares of Common Stock of the Company
initially issuable upon exercise of the Warrants represent approximately 2.62%
of the outstanding Common Stock of the Company on a fully diluted basis as of
January 31, 1997.
The net proceeds of the Offering to the Company were approximately $684
million. Other than $134 million placed in a pledged account to pre-fund the
first six interest payments on the Senior Notes, the net proceeds from the
Offering were used by the Company to repay the Orion 1 credit facility and may
be used to build and launch additional satellites, including the Orion 2 and
Orion 3 satellites.
On January 31, 1997, the Company also completed the sale of $60 million of
its convertible junior subordinated debentures (the "Convertible Debentures") to
two investors, British Aerospace Holdings, Inc. ("British Aerospace") and Matra
Marconi Space UK Limited ("Matra Marconi Space") purchased $50 million and $10
million of the Convertible Debentures, respectively (collectively, the
"Convertible Debenture Investments," and together with the Offering, the
"Financings"). The Convertible Debentures will mature in 2012, and will bear
interest at a rate of 8.75% per annum to be paid semi-annually in arrears solely
in common stock of the Company. The Convertible Debentures are subordinated to
all other indebtedness of the Company, including the Notes.
25
<PAGE>
BUSINESS AND OWNERSHIP
As a result of the transactions as described above, Orion Network Systems,
Inc. is a holding company with no assets or operations other than its
investments in its subsidiaries. Through the operations of the following
subsidiaries ("Subsidiary Guarantors"), the Company's principal business is the
provision of satellite-based communications services:
Jurisdiction of
organization or
Name Incorporation
- ---- ----------------
Asia Pacific Space and
Communications, Ltd. Delaware
International Private
Satellite Partners, L.P. Delaware
Orion Asia Pacific
Corporation Delaware
Orion Atlantic Europe, Inc. Delaware
OrionNet Finance
Corporation Delaware
OrionNet, Inc. Delaware
Orion Satellite
Corporation Delaware
Teleport Europe GmbH Federal Republic of Germany
Each of the Subsidary Guarantors is a wholly (100%) owned subsidiary of the
Company. The Subsidiary Gurarantors comprise all of the direct and indirect
subsidiaries of the Company (other thant inconsequential subsidiaries).
Separate financial statements of the Subsidiary Guarantors are not
presented because (a) such Subsidiary Guarantors have jointly and severally
guaranteed the Notes on a full and unconditional basis, (b) the aggregate
assets, liabilities, earnings and equity of the Subsidiary Guarantors are
substantially equivalent to the assets, liabilities, earnings and equity of the
Company on a consolidated basis and (c) management has determined that such
information is not material to investors.
26
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma condensed consolidated financial statements give
effect, as of December 31, 1996, as to the Balance Sheet, and January 1, 1996,
as to the Statement of Operations, to the Exchange, the Merger and the
Financings consummated on January 31, 1997, all as described above. In addition,
the pro forma condensed consolidated financial statements give effect to the
following transactions, which were, directly or indirectly, conditions precedent
to, or result from, the Exchange, the Merger and the Financings as described
above: (i) the use of the net proceeds from the Financings to repay indebtedness
under the Orion 1 Credit Facility, to prefund the first six scheduled interest
payments, and to pay interest rate hedge breakage costs associated with the
Orion 1 Credit Facility, (ii) the acquisition by Orion of British Aerospace's
17% ownership of Orion Asia Pacific for approximately 86,000 shares of common
stock, (iii) payments of approximately $4.0 million, including accrued interest,
owed to STET, a former limited partner of Orion Atlantic, and (iv) the write-off
of deferred financing fees (such transactions collectively with the Merger, the
Exchange, and the Financings, the "Transactions").
The unaudited pro forma condensed consolidated financial statements do not
purport to present the actual financial position or results or operations of the
Company had the Transactions in fact occurred on the dates specified, nor are
they indicative of the results of operations that may be achieved in the future.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS, EXCEPT SHARE AMOUNTS, IN 000'S)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
<S> <C>
Assets
Current assets................................................ $ 149,720
Property and equipment, net................................... 320,707
Restricted and segregated cash................................ 406,937
Deferred financing costs, net................................. 25,865
Other assets, net............................................. 25,365
-------------------
Total assets.................................................. $ 928,594
===================
Liabilities and stockholders' equity
Current liabilities........................................... $ 23,730
Long-term debt................................................ 779,283
Other liabilities............................................. 11,528
Limited Partners' interest in Orion Atlantic.................. --
Redeemable preferred stock.................................... 111,902
Stockholders' equity.......................................... 2,151
-------------------
Total liabilities and stockholders' equity.................... $ 928,594
===================
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1996
-------------------
Services revenue.............................................. $ 41,847
Operating expenses............................................ 82,931
Other expense (income)........................................ 92,546
Net loss...................................................... (133,630)
Preferred stock dividend and accretion, net of forfeitures.... 9,273
-------------------
Net loss attributable to common stockholders.................. $ (142,903)
===================
Net loss per common share..................................... $ (12.71)
===================
Weighted average common shares outstanding.................... 11,247,062
===================
</TABLE>
27
<PAGE>
ORION NETWORK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
TELEPORT EUROPE ACQUISITION
On March 26, 1997, Orion acquired German-based Teleport Europe GmbH, a
communications company specializing in private satellite networks for voice and
data services. Orion purchased the shares of Teleport Europe held by the German
companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for
approximately $9 million.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- --------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Revenues...................... $ 7,646 $ 10,123 $ 12,247 $ 11,831
Loss from operations.......... (10,155) (8,963) (7,151) (10,084)
Loss before minority interest. (16,985) (14,637) (12,985) (17,218)
Net loss...................... (7,251) (6,760) (5,796) (7,388)
Net loss per share............ (0.70) (0.65) (0.55) (0.72)
1995
Revenues...................... $ 2,508 $ 5,238 $ 6,201 $ 8,336
Loss from operations.......... (11,891) (12,038) (13,525) (9,377)
Loss before minority interest. (15,978) (18,248) (19,186) (19,592)
Net loss...................... (5,996) (6,991) (6,998) (6,930)
Net loss per share............ (0.64) (0.75) (0.78) (0.67)
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001029850
<NAME> Orion Network Systems, Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollar
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 42,187,807
<SECURITIES> 0
<RECEIVABLES> 6,573,316
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 52,244,526
<PP&E> 351,513,496
<DEPRECIATION> (68,224,957)
<TOTAL-ASSETS> 358,264,444
<CURRENT-LIABILITIES> 63,029,250
<BONDS> 0
0
20,902,366
<COMMON> 112,447
<OTHER-SE> (548,815)
<TOTAL-LIABILITY-AND-EQUITY> 358,264,444
<SALES> 500,860
<TOTAL-REVENUES> 41,847,292
<CGS> 376,945
<TOTAL-COSTS> 78,200,050
<OTHER-EXPENSES> 25,388,243
<LOSS-PROVISION> 919,453
<INTEREST-EXPENSE> 25,450,284
<INCOME-PRETAX> (27,111,351)
<INCOME-TAX> 84,059
<INCOME-CONTINUING> (27,195,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,195,410)
<EPS-PRIMARY> (2.62)
<EPS-DILUTED> (2.62)
</TABLE>
